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Rating Action:

Moody's upgrades Cabot's ratings to B1

29 Jun 2018

London, 29 June 2018 -- Moody's Investors Service (Moody's) today upgraded the long-term corporate family rating (CFR) of Cabot Financial Ltd (Cabot) to B1 from B2. The rating agency also upgraded the senior secured bond ratings of Cabot Financial (Luxembourg) II S.A and Cabot Financial (Luxembourg) S.A to B1 from B2. The outlook on all ratings has been changed to stable from positive.

A full list of affected entities and their ratings can be found at the end of this press release.

The upgrade of Cabot's CFR was driven by :

(i) Cabot's competitive edge supported by its leading position in the UK debt purchasing industry; and

(ii) the firm's enhanced operating diversification, particularly in terms of sources of revenue, which the agency expects to create cost synergies and improve the firm's ability to generate stable earnings streams.

On 8 May 2018, Encore Capital Group Inc (Encore), which currently owns 43% of Cabot Credit Management Limited, announced an agreement to purchase the remaining interest held by J.C. Flowers & Co and company management. Following the latter, Cabot will become a wholly owned subsidiary of Encore. Moody's considers that the acquisition will lift the uncertainties which had stemmed from the failed IPO in November 2017 regarding J.C. Flowers' exit strategy.

RATINGS RATIONALE

RATIONALE FOR THE CFR

The upgrade of the CFR to B1 is driven by Cabot's leading market position and increasingly diversified business model.

With GBP1.65 billion in total reported assets as of end-March 2018, Cabot is one of the largest rated debt purchasing companies in the UK. The firm has strong cash generating capability with an adjusted EBITDA of GBP297 million in 2017, which has increased by 20% annually on average since 2012. The 120-month estimated remaining collections (ERC) stood at GBP2.4 billion as of end-March 2018, higher than all other UK competitors. Cabot's scale supports its ability to absorb compliance costs and investments in technological innovation, while its strong track-record of regulatory compliance is attractive to vendors facing regulatory scrutiny and conduct-related costs. Moody's expects that such a dominant franchise, combined with Cabot's track record of adequately pricing purchased portfolios, will support Cabot's cash flow generation capacity, and in turn keep its leverage metric well under 5x. As of the end of March 2018, Moody's calculates Cabot's debt at 4.2x EBITDA.

The acquisition, in 2017, of Wescot Credit Services Limited and Orbit Services, two debt service providers for the UK retail banking sector, has supported the company's ambition to grow its third-party debt-servicing business further diversifying its revenues. Moody's believes that the company's increased focus on the more asset light segment should help to mitigate the risk, inherent to the debt purchasing business, of mispricing acquired portfolios, and support Cabot's ability to generate stable earnings streams. This greater diversification also creates synergies, as the debt servicing business creates new business opportunities for the purchasing segment, while leveraging on shared IT platforms and a common set of credit data on debtors.

RATIONALE FOR THE OUTLOOK

The outlook on all ratings is stable, reflecting Moody's view that Cabot's credit worthiness driven by its leading market position and increasingly diversified franchise will be consistent with a B1 CFR over the outlook period.

WHAT COULD CHANGE THE RATINGS UP/DOWN

An expectation that Cabot's long-term strategy will lead to an improvement of its credit fundamentals -- such as at a minimum a combination of a decrease of the leverage metric (gross debt-to-adjusted EBITDA) at under 4x, and of an increase of the interest coverage (adjusted EBITDA-to-interest expense) at around or above 3x, while maintaining other financial metrics and ratios at current levels - could lead to an upgrade of Cabot's ratings.

Cabot's rating could be downgraded due to (i) significant deterioration in profitability metrics; or (ii) a further increase in leverage or sustained decline in operating performance, leading to a debt ratio which is higher than 5x adjusted EBITDA; or (iii) a significant decline in interest coverage, with an adjusted EBITDA-to-interest expense ratio around or below 2.0x.

LIST OF AFFECTED RATINGS

Issuer: Cabot Financial Ltd

..Upgrades:

....Corporate Family Rating, upgraded to B1 Stable from B2 Positive

..Outlook Action:

....Outlook changed to Stable from Positive

Issuer: Cabot Financial (Luxembourg) S.A

..Upgrades:

....Backed Senior Secured Regular Bond/Debenture, upgraded to B1 Stable from B2 Positive

..Outlook Action:

....Outlook changed to Stable from Positive

Issuer: Cabot Financial (Luxembourg) II S.A

..Upgrades:

....Backed Senior Secured Regular Bond/Debenture, upgraded to B1 Stable from B2 Positive

..Outlook Action:

....Outlook changed to Stable from Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Finance Companies published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Roland Auquier
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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